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Reviving nationalism: The only way for us to grow out of our Third-World status

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by December 25, 2016 General

RIGOBERTO D. TIGLAO

RIGOBERTO D. TIGLAO

(First of Two Parts)
The move to lift the restrictions on telecoms by amending the Constitution has been framed in the propaganda spin based on two false arguments repeated over and over again in the Hitlerian fashion of the “Big Lie.”

Essentially, these claims deny the historical fact that it was economic nationalism, not globalization nor foreign capital that helped bring most developed countries, including those in Asia, to their prosperous status today.

The first argument is that the constitutional restrictions on foreign capital in public utilities are one of the main reasons why foreign direct investments (FDIs) in the country are smaller than those in many other Asean countries. The second is that a major reason for our economic quagmire is the lack of FDIs. Both claims are utter nonsense, and are based not on empirical evidence, but on ideological beliefs.

On the first claim, it is not the restrictions on foreign investment that explain why inflow has been low. Foreign capital are now the biggest shareholders in the telecom and power industries. How could that be if there were restrictions? The fact is that Indonesian and Singaporean capital, in collaboration with the local elite and government agencies, have de facto removed the constitutional restrictions.

Poor and inefficient business conditions the lack of physical and technological infrastructure; expensive electricity; a limited and run-down highway network; an inefficient port system, and corruption are the real principal factors that hamper the flow of investment into the country. (See among other numerous studies on this topic, the World Bank’s “Ease of Doing Business” annual reports.)

Our small FDI stock compared with that of our neighbors is also the result of a unique set of events in the 1980s.

The 1989-91 coup attempts against the Philippine government, together with the kidnapping of a Mitsui executive here in 1987 scared off foreign investors, at a crucial time when Japanese investment inundated Asia like a tsunami as part of Japan’s thrust to internationalize their manufacturing sectors. Those events took place after the so-called “Plaza Accord” led to a massive appreciation of the yen — as much as 46 percent — relative to the dollar and other world currencies. From an annual average of $3 billion from 1970-1980, Japanese investments abroad swelled 10 times to $31 billion from 1986 to 1992.

Coup attempts

Because the Philippines was perceived as unsafe due both to the many coup attempts and the kidnappings, Japanese investors skipped the country and, instead, went to Malaysia, Thailand, and Indonesia. Our FDI stock stood at $2.8 billion in 1986, bigger than Thailand’s $2.3 billion. By 1992, though, Thailand’s FDI level grew six times to $12.3 billion, mostly due to the massive inflow of Japanese investment while the Philippines recorded only $4 billion.

Malaysia (with its assembly operations for the electronics industry) and Indonesia (for its natural resources such as tin and oil) caught much of the wave of Japanese investment during that period, so that Malaysia’s FDI stock nearly tripled from $6 billion in 1986 to $17 billion in 1992, while FDI in Indonesia doubled from $6 billion to $12 billion, according to UNCTAD statistics. None of the FDI flows in that period found their way into telecoms and other public utilities in our neighboring countries because foreign investment in such industries were curtailed either through explicit regulations or bureaucratic hurdles. Instead FDIs in these countries were encouraged and supported into export-oriented and high-tech industries, and not into public-utility monopolies.

The second claim in the propaganda over FDIs is the belief that such capital inflows are necessary for the economic development of any capital-deficient country such as the Philippines.

However, a growing body of studies since the 1980s has debunked such a view. The fact is that FDI flows in the Asian Tiger economies, as well as in Japan and China, increased only when they started taking off on their high-growth path, not before, as transnational companies are quick to take advantage of low wage rates and expanding markets.

FDIs were not the fuel behind the Asian Tigers’ growth. Foreign investors simply piggy-backed on economic growth in the region in its early stages, achieved through a national pragmatic plan that disregarded laissez-faire dogmas.

In fact, Asian Tigers, at the start of their growth in the 1960s (except for Hong Kong and Singapore, which are anomalies since they are tiny entrepôts) also imposed strict restrictions on foreign investments, and shepherded those that came in into specific industries they calculated would stimulate economic growth. These were mainly heavy industries (especially in the cases of Japan and Korea) and export-oriented manufacturing enterprises (as those in Malaysia and Taiwan).

The Philippines, since after World War II up to the mid-1970s, absolutely had no restrictions on investments or on imports from the biggest economy and capital-exporter at that period, the United States. This was because we had that grossly misnamed “Parity Amendment” to the 1935 Constitution which gave US businesses until 1974 the same rights and privileges as local capitalists. Did such policy of free-flow of American capital result in huge US investments here? Did US foreign capital boost our economic growth?

Debatable

While it remains debatable whether FDIs may even have a negative impact on a country due to the massive profit remittances and crowding of the local credit market involved, what is not disputed is that FDIs should not get into “brownfield” projects (the acquisition of existing companies and facilities) but greenfield enterprises, specifically industries into which local capital has been hesitant to go. Salim’s control of PLDT, obviously, was simply an acquisition.

One of the main arguments for foreign investment is that the country does not have sufficient capital to fund its economic expansion. Several studies using data from different countries have disputed this, as foreign companies either tap the local credit markets, or use their assets in the host country as collateral for loans from the world financial markets.

This is false. The power-distribution monopoly Meralco for instance was acquired by the Indonesian magnate Anthoni Salim not through new money coming in from Hong Kong or from one of his many British Virgin Islands-registered companies but mainly through the fianances of the pension fund of Philippine Long Distance Telephone Co. (which he has controlled since 1998) that he deployed and capital raised through the stock market. Foreigners’ dominant shares in PLDT, Meralco, and Globe, have in fact contributed to substantial capital outflow from the country in the form of dividends. From 2000 to 2015 these profits have totaled $10 billion, the equivalent of the country’s historical net foreign investment inflows for seven years, except that in this case these went out of the country

A response posted so many times in the comments section of my columns on Salim’s control of our public utility firms goes as follows: “I don’t care who runs PDLT or Globe, as long as I get efficient, cheap service.”

That’s a certainly a valid view for an ordinary consumer. But it is a very short-term view, because down the road the consumer will suffer the consequences of a foreign-dominated telecom industry. Among these consequences are the foreign firms’ capital outflows that contribute to overall economic underdevelopment and the government’s giving up of this strategic industry as a tool for economic growth.

Foreigners’ monopoly of our telecom industry in fact has already made cellphone service one of the most expensive in Asia, and broadband speed here among the lowest.

That perspective would also be irresponsible for the country’s leaders to take, given their task of not only running an efficient government but laying down the groundwork, including the necessary infrastructure, for sustainable development for decades, even a century to come.

Telecom firms provide essential public services, and the state has the duty to assure its citizens that these are efficiently provided at the least cost — without the profit margins usually exacted by ordinary enterprises — and in the same way government provides such public services as police security, along with water and electricity supply.

Telecoms essential to growth

The telecommunications industry is essential to economic growth, as much as roads and bridges are, because the efficient transmittal of information makes markets and production more efficient, besides the fact it reduces transaction costs. Efficient transmission of information improves productivity. Thus, telecoms directly and indirectly contribute to a country’s economic growth.

The poor state of our telecoms industry, in fact, had contributed to the host of factors that explain our weak economic growth rates in the 1980s and 1990s. This is reflected in the marginal increase in the number of fixed-lines per 100 inhabitants in the Philippines from 0.7 in 1975 to 1.0 in 1992, according to World Bank data.

This does not compare with those of Malaysia and Thailand, which rose in the same period from 1.4 to 10.9, and from 0.5 to 3.1, respectively. That, undoubtedly, was a factor that discouraged foreign investments in our case.

Most other states in the world have realized, logically, that the telecom sector is too crucial to be left alone to private corporations, whose prime directive, after all, is not to deliver efficient services but to generate profit for their small group of stockholders. Most countries in the world and all Asian countries (as well as most Scandinavian countries), therefore, have state agencies or their citizens’ corporations, and not foreign entities, running their telecom sector.

Moreover, the Asian Tigers regarded telecoms not just as a sector that must provide efficient service to their people; they consciously developed the industry and its support sectors, nurturing the mostly state-owned telecom companies to make them global industry and technology leaders that they are now.

Take the case of Japan. The totally state-owned (until 1985) Nippon Telephone and Telegraph (NTT) is now the third largest telecom company in the world and a global technology leader. In South Korea, the state-owned Korean cellular phone firms have helped make Samsung and LG Electronics among the biggest cellphone manufacturers in the world.

It was only as recent as the 1980s that mature economies with developed, state-owned telecom operators started to inject competition into their telecom markets, partly by privatizing the sector, or opening up the state firms to minority private investors and operating them as independent corporations. Japan’s NTT, for instance, was privatized in 1985 but only to the extent that state ownership, by law, was not reduced to less than one-third of the company’s equity.

In contrast to almost all Asian countries, the Philippines never considered telecoms as a sector that needed to be nurtured and developed by the state as a sector crucial for economic growth. “The Philippines is an exception to the statist model of Asian telecommunications. Ownership and control of nationwide telecommunications have been in the private sector from the era of American colonialism to the present,” a comprehensive study of the Asian telecommunications industry said.

It had not occurred to Philippine governments that the telecom sector is such a crucial public utility that the industry cannot be left alone in the hands of the private sector.

* Among such studies: Carkovic, Maria V, and Ross Levine. “Does Foreign Direct Investment Accelerate Economic Growth?” University of Minnesota, Department of Finance, Working Paper, 2002; Eichengreen, Barry. “Capital Account Liberalization: What Do Cross Country Studies Tell Us?” The World Bank Economic Review 15, No. 3, 2001: 341-365; Pereira, Luiz Carlos Bresser, Globalization and Competition: Why Some Emergent Countries Succeed While Others Fall Behind,” Cambridge; New York: Cambridge University Press, 2010; Rui Moura and Rosa Forte, “The Effects of Foreign Direct Investment on the Host Country’s Economic Growth – Theory and Empirical Evidence”, FEP Working Papers, Nov. 2010; Action Aid, Where Does it Hurt? The Impact of the Financial Crisis on Developing Economies, 2009; and, Rodrik, D. & Subramaniam, A. “Why Did Financial Liberalization Disappoint?” IMF Staff Papers, International Monetary Fund, Washington, DC., 2008.

[With a few revisions, this is part of Chapter 13 of my book Colossal Deception: How Foreigners Control our Telecoms Sector — A Case Study of Corruption, Cronyism, and Regulatory Capture in the Philippines)

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